Market Extra: Why traders are bracing for a volatile British pound ahead of vote on May’s Brexit plan

British pound traders are gearing up for a potentially volatile week as U.K. Prime Minister Theresa May finally brings her Brexit deal with the European Union to a vote in Parliament on Tuesday.

May was initially meant to submit her controversial plan, which is deeply unpopular within her own Conservative party, to a vote in December, but postponed it in order to avoid defeat. Market participants remain skeptical that May will prevail.

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“We expect a majority of MPs to vote against Theresa May’s Brexit deal on Tuesday,” said UniCredit analysts Kathrin Goretzki and Daniel Vernazza, though they “do not expect to see an immediate major reaction in sterling following a defeat.”

hat is because Goretzki and Vernazza’s base case is still that the deal will eventually pass Parliament.

“We would expect sterling to rally across the board once it becomes clear that a deal will be found, with the euro-pound pair likely to break below £0.85,” they wrote in a note.

One euro EURGBP, -1.0089% last bought £0.8929, down 1% on Friday.

The passing of the Grieve amendment earlier this week requires the government to come back to Parliament by Jan. 21 with an alternative plan if May’s deal is defeated.

“As we approach Tuesday’s eagerly awaited vote, the pound is likely to turn even more headline-driven and volatile as some speculators try to pre-empt the outcome of the vote,” said Fawad Razaqzada, market analyst at Forex.com.

One of the most volatile crosses was the British pound/Japanese yen pair GBPJPY, +0.75% Razaqzada said, and the pound “has the potential to drop sharply [against the yen] if Mrs. May’s Brexit deal is rejected by the parliament,” he said.

Sterling was up 0.8% against the yen at ¥139.42 on Friday.

“The lessons learned from U.K. politics and the pound over the past few years is that the price action over the next week will likely contain a lot of gap risk, probably lack a clear direction, and see the market jump quickly on negative news,” wrote Jordan Rochester, FX strategist at Nomura.

At the same time, folks with short positions in the British pound GBPUSD, +0.6981% might well find themselves disappointed as politicians will try to find a way to get things in order, according to Rochester.

Sterling rallied 0.8% against the U.S. dollar on Friday to $1.2853, after London’s Evening Standard reported that government officials see an increased likelihood that Brexit will be delayed beyond the anticipated March 29 deadline.

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The pound “would benefit from having more time added to the clock but equally would suffer from months more of political uncertainty. So overall we wouldn’t get too optimistic if we witness further can kicking vague politicking,” said Rochester.

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“But as it stands, the U.K. is scheduled to leave the EU on March 29, with or without a deal. However, things could change dramatically next week, depending on the outcome of the vote. It is possible, for example, that Mrs. May might resign if the parliament rejects her deal, which could pave the way for a whole host of possibilities and uncertainties,” Razaqzada said.